Car Insurance: Why It’s More Than Just a Legal Requirement (Protect Your Wallet and Your Ride with These Essential Tips)
Are you confused about car insurance? Are you unsure about the type and amount of coverage you should have? Are you wondering about how a deductible works? If you answered yes to any of those questions, then this article is for you.
It's dangerous out there on the road. That's why car insurance, in my opinion, is the most essential type of insurance. Today I'm going to go over the five core parts of an auto insurance policy.
Then I'm going to talk about how deductibles work and how to choose the right amount for your situation. And finally, I'll finish with three essential add-ons for your policy. Make sure you stick around until the very end when I'll tell you about the only state in the U.S. where auto insurance is not mandatory.
Five core parts of an auto insurance policy:
Bodily injury liability
Property damage liability
Collision
Comprehensive
Uninsured or underinsured motorist coverage
Let's go over each of these five parts one at a time so you understand what's being covered and how much coverage you should select.
1. Bodily Injury Liability.
If you ask me, this is the most important part of an auto insurance policy. If you get into an accident and you're at fault for that accident, your bodily injury liability coverage will compensate the people you injure. I'm talking about any medical bills, lost wages, and legal fees that arise due to the accident.
Your insurance company will pay for all of those expenses so you don't have to. Bodily injury liability coverage typically has two numbers associated with it. Some common options are 10,000, 20,000, 50,000, 100,000, and 100,000, 300,000.
Sometimes you'll see these options abbreviated as 10-20, 50-100, and 100-300. These numbers represent the limits or maximum amounts that an insurance company will pay out in an accident. The smaller number is the maximum amount they'll pay to a single person, and the larger number is the maximum amount that they'll pay in total to everyone who is injured in the accident.
As an example, let's say you have 50,000-100,000 limits. You get into an accident and injure
three people in the car you hit. Your insurance company would pay up to $50,000 to a single person, but no more than $100,000 to all three people combined.
The lower your limits, the less expensive your insurance will cost. But if you're at fault in an accident and don't have enough bodily injury liability coverage to compensate the people you injure, it's fairly likely that you'll be served with a lawsuit. For this reason, I'd recommend a minimum of 100,000-300,000 for your bodily injury liability limits.
2. Property Damage Liability. This coverage is similar to bodily injury liability, except for one key difference. If you get into an accident and you're at fault for that accident, your property damage liability coverage will pay for any damage you've caused to other vehicles, buildings, and property.
So if you crunch up someone's bumper, run over someone's mailbox, or drive through someone's front door, property damage liability will pay for the repairs so you don't have to. Just like with bodily injury liability, property damage liability has a limit. Some common options are $25,000, $50,000, and $100,000.
These limits represent the maximum amount in total per accident that the insurance company would pay out. Again, the lower your limit, the less expensive your insurance would cost. In a lot of places, you can get as little as $10,000 of property damage liability coverage.
But is that such a good idea? To find out, I asked my friend, an insurance agent from Miami. If you hit another car, sure, if you do a little fender bender and it's not a big deal, and you hit someone's bumper and coming out of a parking spot or something, it may not be a big deal. Maybe a couple thousand dollars and the insurance company obviously would pay for it even if you have that $10,000 minimum limit of property damage.
But again, when it comes to affordability and exposure, $10,000 may not be enough if you hit a car that costs $30,000, $40,000, $50,000 and you hit it pretty bad and their car's a total loss,
$10,000 is not going to cut it. There are a lot of new cars driving around on the road. You certainly don't want to have the minimum amount of coverage if you smash up someone's brand new BMW or Mercedes.
That's why I'd recommend a minimum of $50,000 of property damage liability coverage.
3. Collision Coverage. If you get into an accident and it's your fault, collision coverage is what's going to pay for the repairs to your vehicle.
If you hit another car, a tree or a guardrail and your car needs repairs, your insurance company will pay for it if you have collision coverage. If you can't afford to replace your car tomorrow, I'd recommend purchasing collision coverage. When you do, you need to select something called a deductible.
4. Comprehensive Coverage. This coverage is similar to
collision in that it covers damage to your vehicle, but with comprehensive coverage, it's all about the damage that's beyond your control.
I'm talking about things like a tree falling and crushing your car, a thief smashing your windows, or a flood inundating your car with water. In these types of situations, your insurance company will pay for the damage if you have comprehensive coverage. Just like with collision coverage, if you can't afford to replace your car tomorrow, I recommend getting comprehensive coverage.
Again, you'll need to select a deductible and I'll get to that in just a few. Last but not least is uninsured or underinsured motorist. I'll let Robert explain this one.
5. Uninsured
motorist coverage
Uninsured motorist coverage would be a coverage that covers your medical injuries in case a person that hits you or is at fault in an accident against you, either that person does not have enough liability coverage to cover your medical injuries or they didn't even have bodily injury coverage or maybe it was a hit and run and they left and you had no idea. It's estimated that one out of every eight drivers in the U.S. does not have any auto insurance at all and an even larger percentage of drivers carries the minimum state required limits for bodily injury liability and property damage liability. If one of those uninsured or underinsured drivers injures you in an accident, their insurance might only pay you $10,000 or $15,000.
We all know that kind of money won't go very far if you have to go to the hospital and if you were driving your brand new Lexus, you could end up covering the repairs yourself. That's where uninsured or underinsured motorist coverage kicks in. There are two components to this coverage, one for bodily injury and one for property damage.
I recommend you select the same limits for bodily injury as you have for your bodily injury liability coverage. For the property damage portion, I recommend choosing an amount that's slightly more than the value of your vehicle. Depending on what state you live in, there may be one more component to your auto insurance policy called personal injury protection or PIP.
This type of coverage is sometimes referred to as no fault insurance or medical expense benefits. It's currently required in 16 states and optional in several others. If you have PIP coverage and you're injured in an accident, your insurance company will pay up to a certain amount to cover your injuries.
Both the amount and what's covered by PIP vary widely from state to state.
Three primary benefits to PIP coverage
First is that it comes before your health insurance. You don't need to meet your health insurance deductible before the PIP insurance kicks in and covers your medical expenses.
Second, you get paid quickly. You don't need to wait for any legal processes to play out while medical bills pile up.
And third, it helps keep the legal system running smoothly. In states where PIP is required, it prevents a bunch of minor cases for $3,000 or $5,000 from going to court and clogging things up. You'll need to get PIP if you're required by your state, but even if it's optional for you, I think it's a good idea to add it to your policy.
Now that you've got a good handle on the parts that make up an auto insurance policy, let's talk deductibles. When you add the collision and comprehensive coverages to your policy, you'll need to select something called a deductible. If you make an insurance claim and ask your insurance company to pay for damage to your vehicle, they'll write you a check.
That check will be for the cost of the repairs minus the deductible amount. Let's say you had a
$1,000 deductible on collision and you were to get in, let's say you hit a wall and your car had
$4,000 worth of damages, the insurance company would give you $4,000 minus your $1,000 deductible, so you'll get $3,000 to fix your vehicle. It's not that you have to put the money out of your pocket, you don't have to pay $1,000 to get to $3,000, and they’ll just deduct it from the claim payment.
The same thing goes for comprehensive. If your car was stolen and you have a $1,000 deductible and your car was worth, let's say they gave it a $10,000 valuation; they would give you $9,000 if you had a $1,000 deductible. You get to choose what the amount of your deductible is, and you can generally choose anywhere from $0 all the way up to $2,000 or more.
The lower your deductible, the more that collision and comprehensive coverage will cost. The higher your deductible, the less those coverage’s will cost. As I mentioned earlier, if you can't afford to replace your car tomorrow, I recommend getting both collision and comprehensive coverage.
And if you financed or leased your vehicle, both of these coverages will probably be mandatory. The deductible you choose should be based on what you can afford to pay for repairs if your car is damaged, and also based on the cost of the coverage. As an example, you might feel comfortable paying $1,000 if you're involved in an accident, so you select a $1,000 deductible for your collision coverage.
When you're pricing out your policy, you notice that to move down to a $500 deductible is just
$2 more per month. If you paid that extra $2 per month, 12 months per year, for 10 years before getting into an accident and filing a claim, you would have paid an extra $240 for that lower deductible. But when that accident happens, your deductible costs you just $500.
$500 plus $240 is $740. If you went for the $1,000 deductible, you'd be at $1,000 when that accident happens. In this situation, it's a no-brainer to go with the lower $500 deductible.
Experiment with different deductibles on your insurance policy to see how the overall cost changes. There's a really good chance that a much lower deductible is just a few dollars more per month, and if that's the case, I say go for it. I also suggest the same practice when pricing out your bodily injury liability, property damage liability, and uninsured or underinsured motorist coverages.
Sometimes, it's just a few dollars more per month for an extra $25, $50, or $100,000 of coverage. It's never a bad idea to have some extra auto insurance coverage. And if you can afford to and it makes financial sense, don't hesitate to go for the maximum amounts your insurance company will allow.
Before I wrap things up, I want to talk about three more coverages you may want to add to your auto insurance policy. The first one is called gap coverage, and it's worth taking a look at for leased or newer vehicles that are financed. We all know that new vehicles depreciate in value pretty rapidly in the first few years.
Because of that rapid depreciation, if you've leased or financed a new vehicle, you could owe more on that vehicle than it's currently worth. That's bad news if you get into an accident and it's totaled, because your insurance company is only going to write you a check for the value of the vehicle. If that check is for less than you owe, guess who's on the hook for the difference? That's right, you are.
That is, unless you've added gap coverage to your insurance policy. Gap coverage will take care of the difference between what your vehicle is worth and what you owe on it. If you owe more on your vehicle than it's worth, I think gap coverage is essential.
Second is rental car coverage. If your vehicle is in the shop for repairs that are being covered by your auto insurance policy, you're going to need a rental car to get around. And if you have rental car coverage, your insurance company will pay up to a certain amount for that rental car.
This could end up saving you hundreds of dollars if you have to file a claim. Third is roadside assistance. If you get locked out of your vehicle, run out of gas, or need to be towed, roadside assistance coverage can come in handy.
Your insurance company will dispatch someone to your location to help with your problem. Both rental car coverage and roadside assistance coverage tend to be very inexpensive. On my policy, they're each just one dollar per month.
For that reason, I think both are worth having. There's just one state in the U.S. that doesn't require auto insurance, and it's New Hampshire. But there's a catch.
You need to prove to the state that you have the financial means to cover the expenses related to an at-fault accident. If I lived in New Hampshire and had the means, I think I'd still get auto insurance regardless. What about you? If you had the option, would you still buy insurance or skip it?